Business Review

Nasstar provides computing services on the internet enabling users to do all their computing online from anywhere -including access to their desktop, files and applications such as email and Microsoft Office Professional - through a web browser. This means all your computing is done via the internet rather than on a locally installed computer. This model of delivering computing via the internet rather than from a local PC is known as 'cloud computing' or 'Software as a Service'.

Nasstar's philosophy for future growth has emerged with force during the period. The philosophy is to keep it simple and scalable, just do one thing - cloud computing - and focus on doing it better than anyone else.

The Market

To understand the market in which Nasstar operates it is necessary to set out a brief overview of the trends of the internet. When the internet started, businesses had computing systems on-premise. Data and software was installed locally on PCs under the desk. The commercial internet started and web hosting companies were set up to register domain names, host web sites and provide POP3 email. A large number of web hosting companies were created and in due course between 1999 and 2001 the web hosting market was consolidated, resulting in a small number of large hosting companies dominating the market. The second wave of the internet saw the emergence of hosted email services with companies starting to outsource their email service to benefit from anti-virus and junk mail services that protected business email from the rapidly growing amount of viruses and spam. Nasstar launched its hosted email service in January 2003 and launched Hosted Exchange in June 2004. Hosted exchange has become the principle business email service and a very competitive market that will in due course inevitably see consolidation. The third wave of the internet is happening now, and this is dominated by two main services – voice over IP and software as a service. This third wave sees a dramatic change in make-up of information technology because it enables a big change to happen in the way businesses purchase core information technology services. Neither web hosting or hosted email services led to a dramatic change in the make-up of IT because businesses still needed to host their business software (such as Microsoft Office and accounting software) on-premise along with their data. However, the third wave of the internet enables businesses to move all their computing needs including software and data to a hosted service. Businesses need internet access, screens, keyboards, printers and 'thin clients' but other than that all applications and all data can be hosted and accessed over the internet, resulting in cloud computing and a radical change in the landscape of IT.

The market for third generation internet - cloud computing - is developing at a fast rate. Last year Google launched Google Apps which makes certain applications accessible on the internet including Docs, the Google version of Microsoft Word, and Spreadsheets, the Google version of Microsoft Excel. The fact that Google regard Google Apps – "in the computational cloud” to use their phrase – is evidence of the shift that is occurring from on-premise local installed computing to computing via the internet. Recently announced was the launch of 'Live Documents' which has been launched by Sabeer Bhatia, the founder of Hotmail (the web based email service purchased by Microsoft). It is believed that Live Documents will be similar to Google Apps in providing cloud computing through internet based applications. The fact that companies such as Google see the future of computing as being 'in the cloud' endorses the vision Nasstar have of providing these services as a radical alternative to local installed 'on-premise' services. Nasstar launched its first version of hosted desktop - cloud computing - in 2004 and has subsequently revised and improved the service. The service uses Microsoft Office and Windows desktop as its foundations, and in the view of the Directors this approach is the solution most businesses would prefer to adopt because Microsoft Office and desktop are technologies businesses know and use. Nasstar delivers them in the cloud rather than on a PC in an office, and that is the dramatic change in approach. Nasstar's service also benefits from being able to host non-Microsoft applications such as Sage or Quickbooks accounting software, Adobe software and other key third party applications. As a result Nasstar's service can provide a simple one-login service for a business to access all its files and applications (contrast Google which only allows you to use a few Google applications).

The benefits of cloud computing include:

• * Anywhere access to your computer desktop, files, company data and software
• * Enables flexible working, with employees able to use their computer over the internet from home, work or abroad
• * Services are paid for by monthly subscription, and subscription is as simple as subscribing for a TV service or mobile phone account;
• * Payment is by Direct Debit
• * Per user per month subscriptions mean predictable costs
• * No up-front capital expenditure is required as businesses do not need to purchase their own servers or perpetual software licenses;

The benefits of cloud computing include:

• * Scalable systems
• * Customers themselves can add more subscribers through the customer portal, thereby spending additional subscriptions with 'zero touch' by the company
• * Services provided are essential business services
• * Recurring revenue
• * Average revenue per customer tends to increase over time
• * Direct debit collection

Operations

The Group has focussed automating a number of processes this year to provide scalability and to ensure that as the business grows certain overheads remain stable and low-cost. The Group's billing system is one key achievement. Historically all invoices were created manually on spreadsheets, printed, posted and then entered into Sage one invoice at a time. This approach was immensely time consuming, taking an increasingly lengthy time to generate the invoices each month as the number of customers grew. Furthermore as the number of invoices grew the time taken to enter the data in to the Group's accounting software grew sequentially. In addition there was the growing cost of printing and postage and most significantly there was the risk of human error in calculating the usage (number of subscribers and storage) for each customer. Clearly this system was not scalable for a fast growing company and so a new automated system was developed in-house. The new billing system that was introduced in March 2007 is automated as follows. For each customer a per user per month fee is agreed for the hosted exchange email service, blackberry and hosted desktop service. The fee for storage of a customer's data is also per an agreed tariff. The billing system then automatically interrogates the live system databases to produce a detailed breakdown of all users and storage. At the end of each month the billing run is done by a one-click process. The system queries all the usage for each customer and generates all the invoices. The invoices display a front page summary of usage and then provide a detailed breakdown of usage, listing all the subscribers and storage being used by the customer and calculating the total cost. During the process the invoices are all created as electronic PDF (Portable Document Format) files and emailed to the billing contact for the customer. All invoices generated are stored and referenced in the billing database ensuring they can be retrieved, reviewed or re-sent in the event of a query. The data from each invoice run is then exported by a simple process and imported in to the Group's accounting software. Currently approximately 600 invoices are generated each month. One of the main benefits of the new billing system is that whether there are 600, 6,000 or 60,000 invoices each month the process remains a simple one-click function that takes seconds to process.

Customer Portal

A key achievement this year, again for scalability, was the introduction of a customer portal that enables customers to securely login and view and manage their services. Prior to the introduction of the customer portal, any customer who wished to add a new mailbox (and therefore increase their spend with the company) had to telephone or email support and wait for the mailbox to be added. The customer portal enables the customer (through appointed authorised administrators) to add mailboxes, re-set passwords, delete or disable users, activate or re-activate blackberry and other management functions. The Company is encouraging customers to use the customer portal as it achieves two fundamental objectives: firstly, the customer has a better experience as they have a level of control over their service and can add the users and manage the functions when they want without having to telephone or email support; secondly it reduces incoming support calls and emails thereby reducing the company's support overhead.

Direct Debit scheme

Nasstar invoices customers at the end of each month for usage in arrears. For scalability and cash flow the Company has implemented a Direct Debit scheme.

Marketing Review

During the period the Company has focussed sales primarily on hosted exchange – the entry service to cloud computing. During the last quarter of the period the Company began to channel sales effort on hosted desktop, the full cloud computing service that enables subscribers to access their desktop, files and applications through a web browser on the internet. The Company has appointed a leading global marketing agency to re-design the Company's web site and produce all the necessary marketing materials to communicate effectively the simple proposition that now exists. The new Nasstar web site and marketing materials will be launched in the first quarter of 2008 and be supported by a carefully planned marketing campaign during the next period.

Focus on core activities, keeping it simple

The focus of Nasstar is on keeping it simple and scalable, doing one thing and doing it better than anyone else. This philosophy has focussed resources during the period on scalability and ensuring the core services of hosted exchange, blackberry and hosted desktop are highly redundant. This has involved investment in additional equipment to ensure that these core services can scale quickly with redundancy to ensure service continuity at all times.

Nasstar's computing services

Nasstar is promoting its computing services as a simple subscription model, similar to the approach taken by satellite or cable television companies. The subscriptions available are:

Full subscription: this provides a subscriber with access in the internet cloud to their 'virtual' computer, desktop, files, company data and business applications including Microsoft Office software.

Basic subscription: this is the Hosted Exchange service, the entry to cloud computing. This enables a subscriber to access their email from anywhere using either Outlook, through a web browser or on a mobile device such as a BlackBerry.

Virtual Email

Network Support International Limited trading as Virtual Email ("Virtual Email”) was acquired in December 2006. The invoicing, accounting and staffing were quickly integrated into Nasstar in January 2007. Although all invoices from January 2007 have been issued as Nasstar invoices, approximately one-third of the Group's turnover for the period – circa £400,000 – was the result of the Virtual Email acquisition.

Principal risks and uncertainties

In accordance with the guidelines for this Business Review, the principal risks and uncertainties will be considered under the following headings: strategic, commercial, operational and financial risk and reputational risk. Further information on financial instruments and associated risk is set out in note Error! Reference source not found. to the financial statements.

Strategic risk

The software as a service model that Nasstar provides involves hosting software made by third parties, primarily Microsoft. A strategic risk is that software vendors decide to host their own software and seek to cut out service providers such as Nasstar. The Directors consider this to be an extremely remote risk to Nasstar's service. The Directors' reasoning – based on the service Nasstar provides – is that businesses which use software as a service invariably need to use the software of more than one vendor, for example they may need to access Microsoft Office, Sage Accounts and Adobe Acrobat software. In addition, most users of Nasstar Desktop have their own industry specific or bespoke software that is hosted as part of the service. Even assuming software vendors offer an increasing amount of their software through a web browser, it is submitted that the end user would still have to log-in and log-out of multiple different systems to use the different vendors' software. In the Directors' opinion this would provide a cumbersome and inefficient desktop environment. Nasstar's cloud computing solution provides a single login point of access to a virtual computer with full desktop and browser and therefore acts as a gateway for users to access all of their hosted software including software from different vendors.

Competition

Competition exists in the market and the Directors' believe that the hosted applications market is fast growing. Recently Google announced that it would be introducing 'Docs and Spreadsheets' into its Google Apps system as part of a planned growth in the hosted applications market. The fact that Google wishes to grow in the hosted applications market adds significant weight to the arguments put forward by Nasstar that hosted applications (also referred to as software as a service) is the future of software delivery. Nasstar's software as a service is a markedly different way of delivering software in comparison to the traditional model of local based server and PC installation. Potential customers need educating in the difference and the fact that Google is expanding in the hosted applications market helps make potential customers aware that what Nasstar is doing is the way of the future.

In terms of competition, the market for hosted Exchange is competitive. The Directors are confident that Nasstar is establishing itself as one of the market leaders and that we are able to compete effectively with the other providers of hosted Exchange.

Operational and financial risk

As set out in last year's Annual Report, one risk highlighted was the risk of debtors taking time to pay. It was stated that the Company proposed to establish a direct debit scheme to address this risk. During the period the Company became an approved direct debit originator and implemented a direct debit scheme.

Financial review and key performance indicators

Turnover increased by 115% to £1,193,000 in line with the Directors' expectations. The increase in turnover was achieved at a time when the Company's primary focus was the creation of a scalable technical infrastructure. Operating expenses increased by 42% reflecting investment in operating capability and the additional costs of being a quoted company. Loss per share decreased by 33% to 3.4p. Full information is set out in the Consolidated Profit and Loss Account on page 12.

Employees

During the period the Company employed a sales team of four made up of Kevin Bird, one of the Company's Directors responsible for management of the sales team, and three sales staff. The Company has implemented a commission based payment structure for sales staff to ensure they are incentivised to maximise selling opportunities and fully rewarded for their achievements.

The Company has faced challenges in respect of technical staffing with a number of new staff and a number of leavers. One challenge the Company has faced is recruiting good first line support personnel. This has proved extremely difficult and as a result the Company decided during the period to outsource first line support, including the 24 hour support telephone, to a third party company. The benefit of this approach is that as the number of subscribers grows the Company does not have to struggle to recruit new first line engineers as these are employed by the company to which Nasstar outsources the service. Another key factor in respect of first line support is the launch of the customer portal which was launched in July 2007. This enables customers to manage many aspects of the service and it is anticipated that this will gradually reduce the volume of in-bound support requests.

The Company has recruited a support manager who is responsible for managing the relationship with the outsourced first line support company and ensuring customer support requests are processed efficiently and in accordance with the Company's Service Level Agreement.

In respect of the accounts department the Company engages the services of a part-time book-keeper and Finance Director and a full-time credit controller. As a result of the direct debit scheme it is anticipated that no additional resource will be required during the next period for credit control despite the rapid increase in customers, this is because new customers are required to pay by direct debit.

In terms of the Finance Director the Company wishes to thank Richard Malkin for his work over the last 2 years and welcomes Tony Eve as our new Finance Director. Richard is stepping down to concentrate on his full-time role as Finance Director at Hoodless Brennan plc.